Lucky Strike maker British American Tobacco says that squeezed disposable incomes are making some smokers cut back and pushing others to buy cut-price illegal cigarettes.

The world's second largest cigarette maker reported rising sales this morning but took its latest trading update as an opportunity to warn about the growing trade in illicit cigarettes.

Michael Prideaux, BAT's director of corporate affairs says that rising taxes on cigarettes have also helped the illicit market grow in many places. He says that illegal cigarettes are often well under half the price of legal cigarettes.

He adds:

Governments with finances under pressure tend to whack up excise... In Ireland, they keep whacking up tax and cigarette consumption has gone up because of the increase in the illegal market.

Tobacco is often cited by analysts as recession-resilient, but that does not mean smokers will not change their habits when their incomes are squeezed. Prideaux adds:

First thing they do is smoke a bit less and then they trade down and then when they things get really tough they go into the illegal market and once they do it is very hard to get them back.

BAT said despite the pressures on consumers and the threat of illicit trade, its sales are up overall thanks to recovery in some key markets such as Russia, France and Germany.

In a trading update, BAT said sales were up 7% in the nine months to the end of September, much of that driven by a push on its top brands Dunhill, Kent, Lucky Strike and Pall Mall.

Nicandro Durante, Chief Executive, summed up the market:

While the challenging economic conditions continued to impact consumers in some markets, other markets are showing signs of recovery. Excise-driven price increases in a few markets will continue to affect industry volumes.

However, we have grown our global drive brands and achieved good growth in revenue and profit. We are on track for another year of good earnings growth.

Shares in the cigarette maker are outperforming an unchanged FTSE 100 to be up 12p, or 0.4%, at £28.64.5.

Analysts at RBS echoed the chief executives words that BAT was "on track for another good year". They have a "buy" recommendation on the shares, which have outperformed the FTSE 1090 by some way this year, and a target price of £31.30

They comment in a research note:

Volume declines should continue to moderate. Furthermore we see price/mix staying at more elevated levels, even in an improving volume environment implying an acceleration in underlying sales growth.

BAT remains one of our preferred picks in the consumer staples space given its enviable geographic footprint, substantial pricing power and also scope for further cost savings.

Meanwhile, analysts at Credit Suisse predict a "strong year" for BAT.

Along with tobacco's well-known recession-resilience features and attractive yield, BAT's self-help growth attributes and the positive underlying top line momentum in emerging markets should help the group to mitigate recent unfavourable foreign exchnage movements, underpinning our Outperform rating.